Friday 27/05/22

  1. In MACRO & MARKETS NEWS, the US economy contracts, Russia cuts interest rates again, Sunak brings in the windfall tax and other measures and the UK listing rules are set to change
  2. In RETAIL-RELATED NEWS, Alibaba posts slow growth, US retailers get a boost, Ted Baker benefits from weddings and the office return, Auto Trader booms and Asda shoppers cut spending
  3. In M&A NEWS, Broadcom puts in a formal offer for VMware, Johnson Matthey sells its battery business and FirstGroup considers a takeover
  4. In INDIVIDUAL COMPANY NEWS, Microsoft slows hiring, Twitter is fined, warehouse demand keeps rising and Klarna chases profit
  5. AND FINALLY, I leave you with some flying, some music and some frenzied dancing…

1

MACRO & MARKETS NEWS

So the US economy shrinks, Russia cuts interest rates, Sunak does the windfall tax thing and UK listing rules could evolve…

US economy shrinks in the first quarter amid rising import costs (The Times, Arthi Nachiappan) shows that the US economy shrank by 1.5% in Q1 versus the same period a year previously, which was more than market expectations. This was the first weakening of GDP since Q2 of 2020 in the midst of the pandemic and is particularly stark given that Q4 of 2021 was very strong. The main culprit has been rising inflation, which are in turn being driven more by record-low US unemployment rather than by rising energy and food costs, which has been the main driver of inflation in Europe.

Russia lowers interest rates by 3pc as rouble rally hits exports (Daily Telegraph, Louis Ashworth) shows that the country’s central bank has cut interest rates for the third time in just one month – from 14% to 11% – as it tries to restrain the rise of the rouble. Just to give you an idea of what has been happening to Russia’s currency, it was trading at 60 to the dollar earlier this week, before the invasion of Ukraine it was around 75, but in March it climbed to almost 140! * SO WHAT? * Russia wants to rein in its currency because it is rendering the revenues from its exporters less valuable on the domestic front, which could push them into a budget deficit. 

Back in the UK, North Sea oil and gas producers hit back at Sunak’s £5bn windfall tax (Financial Times, George Parker, Nathalie Thomas, Chris Giles and Jim Pickard) shows that Sunak bowed to pressure to come back with a much bigger household aid package than had been expected, to help people with rising bills. The overall package is worth about £15bn, £5bn of which will be funded from a windfall tax – dubbed as the “energy profit levy” – that will increase the rate paid by North Sea producers from 40% to 65% and will continue until December 2025 unless oil and gas prices “return to historically more normal levels” in the interim. The other £10bn will come from additional borrowing. He made a “universal offer” to all households and replaced the idea of a £200 one-time repayable discount to a $400 grant that does not need to be repaid. * SO WHAT? * The fact that this boost is waaaaay more than Labour was proposing (they proposed a £2bn windfall tax and Sunak is offering double the amount of support to households) has clearly got them in a flap as they have now accused the government of stealing its ideas. Mind you, this won’t come

without consequences as Sunak statement helps reduce inflation but risks higher rate rises (Financial Times, Chris Giles) reckons that although his actions are likely to take the edge off peak inflation this year and help households at a difficult time, they are likely to make the Bank of England raise interest rates again. UK windfall tax: Sunak’s tinkering will discourage investment (Financial Times, Lex) reiterates the frustration of the oil and gas companies who make warnings that this will delay/curtail investment in renewables projects, although the government argues that a “super-deduction” tax relief will address that. I am inclined to think that, looking through all the whinging, this could actually be a good thing for the oil and gas companies affected as it should remove a potential “will-they-won’t-they” cloud, particularly as this windfall tax is going to be levied over the next few years. If oil prices normalise then the government can rescind it. At least it is this way around – if it was a one-off windfall tax there would always be a doubt in the mind of oil companies and investors as to whether it could be implemented again, but given that it is now committed to 2025 everyone can get used to it and if things go well they can all get a nice surprise. Perhaps a “reverse-windfall”, if you will.

Then in UK finance watchdog looks to relax rules to boost London listings (The Guardian, Kalyeena Makortoff) we see that the FCA is looking at relaxing our stock market listing rules to attract more faster-growing start-ups after years of losing out to more fleet-of-foot markets like New York, Paris and Frankfurt. One of the proposals is to ditch the current two-tier approach where companies choose from a “standard listing” or a more onerous “premium listing”. All the companies would instead just need to adhere to one set of rules, with the option of opting-in to stricter rules that would qualify them for the FTSE main markets. * SO WHAT? * It is thought that a more simplified set of rules will be of particular benefit to biotech and other science start-ups that have problems meeting the requirements. This comes not that long after new rules were brought in to make the stock exchange more tech-friendly – namely the allowance of dual class share structures and reduction of the proportion of shares that need to be available to outside investors from 25% to 15%. Some say that this has helped boost the number of listings, but I get the feeling that this was more a macro thing than anything prompted by a change in the rules!

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

2

RETAIL-RELATED NEWS

The world of retail never ceases to be interesting…

Alibaba, hit by Covid in China, posts slowest revenue growth since IPO (Wall Street Journal, Shen Lu and Yoko Kubota) shows that slow revenue growth has persisted for a second quarter in a row and makes things even harder for the company that has already been hit by a regulatory crackdown. Unsurprisingly, there was a major shift in spending over March and April as demand for essentials went up while demand from more discretionary items weakened. The company also did not announce an annual forecast – something that it usually does – due to the unpredictability of forecasting due to all the lockdown stuff. The gloom in China continues…

American shoppers boost retailers with spending on work clothes, discount staples (Wall Street Journal, Suzanne Kapner and Sarah Nassauer) highlights increased spending at department stores and discount chains as Macy’s and Dollar Tree posted strong sales performances over the latest quarter, although Macy’s: do not bet on revenge spending boost to last (Financial Times, Lex) suggests that the boom that the likes of Nordstrom and Ralph Lauren have enjoyed may not last and that, as a mid-market player, Macy’s could be vulnerable to a cooling off. Mind you, in the UK, Work and weddings a good fit for Ted Baker (The Times, Ashley Armstrong) shows that the increased need for more formal clothing is driving apparel sales over here as well! Losses at Ted Baker almost halved as a result – pretty useful as it is currently seeking a buyer

for the business. Although its Q1 sales have continued to gather momentum, they are still 37% lower than they were pre-pandemic. * SO WHAT? * I really think apparel sales will pick up throughout the summer for all the reasons stated above. However, the real test is going to be the final quarter IMO as higher costs continue to kick in. 

Elsewhere, Used car buyers face years of shortages, says Auto Trader (Daily Telegraph, Howard Mustoe) cites a bullish Auto Trader as the worldwide shortage of semiconductors means that fewer new cars are being made, which in turn is leading to the ongoing strength in used vehicle sales. This is making Auto Trader very happy as its used-car index indicates a 22% increase in prices year-on-year. * SO WHAT? * The online car marketplace reckons that the shortage of used car stock will continue as there appears to be no let-up at the moment of supply chain problems. I do wonder, however, whether customers will actually start selling their cars, FLOODING the market, as EV deadlines loom in the coming years. For the next year (and possibly two), though, I imagine that the shortage will continue.

Then in Asda shoppers cut spending on clothes as families squeezed (Daily Telegraph, Laura Onita) we see that it’s bad news for the supermarket chain as it found that shoppers cut back on clothes and general merchandise as household budgets increasingly feel the pinch. Customers are buying less food and increasingly switching to own-brands to save money. I suspect we will see similar trends echoing at their competitors.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

3

M&A NEWS

Broadcom follows through, Johnson Matthew pulls out and FirstGroup has a flirtation…

Chipmaker Broadcom to buy software group VMware for $69bn (Financial Times, Antoine Fara and James Fontanella-Khan) shows that US chipmaker Broadcom has followed through on its intentions and put in a formal offer to buy cloud software company VMware for $69bn including debt. * SO WHAT? * This will, if approved by all the relevant regulators, transform Broadcom into a more broadly-based diversified tech company rather than “just” a semiconductor company.

In Johnson Matthey sells battery business (The Times, Robert Lea) we see that Johnson Matthey has sold its

high-performance electric car battery business for £50m in cash to EV Metals, a Saudi-Australian company. * SO WHAT? * Although EV batteries are a “hot” business, Johnson Matthey just couldn’t make it work. At least this will have saved job losses!

Then in UK train operator FirstGroup considering a £1.2bn takeover (The Guardian, Julia Kollewe) we see that Britain’s biggest train operator – and second-biggest bus operator – is considering a takeover offer from US private equity firm I Squared Capital, which has come up with offers before. The PE firm has a focus on energy, utilities, telecoms and transport in the Americas, Europe and Asia and FirstGroup’s shares jumped up by 15% on the news.

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

4

INDIVIDUAL COMPANY NEWS

Microsoft tightens its belt, Twitter gets a fine, warehouse demand continues and Klarna wants to focus less on growth and more on profit…

In a quick scoot around other interesting stories today, Microsoft slows some hiring amid economic uncertainty (Wall Street Journal, Aaron Tilley) shows that it has become the latest Big Tech company to get more cautious in the face of strengthening economic headwinds. Meta Platforms, Twitter and Uber have all recently announced that they will be cutting back on hiring plans.

Twitter to pay $150million privacy fine as Elon Musk deal looms (Wall Street Journal, David Uberti) highlights the company’s $150m fine to settle a federal privacy suit where it had been accused of harvesting phone numbers and e-mail addresses from its users and then using the info for advertising purposes. Naughty, naughty.

Then in Warehouse demand rages on despite Amazon pullback (Financial Times, George Hammond) we see that the chief exec of urban warehouse owner LondonMetric Property reckons that there is still enough demand in the

UK market to withstand Amazon’s pullback after the e-tailing giant said that it had overextended itself over the pandemic. LondonMetric reckons that demand will still rise from onshoring of supply chains and the growth of smaller e-commerce businesses. Billionaire landlord looks to warehouses beyond London (Helen Cahill) echoes this sentiment as Britain’s tenth richest man, Charles Cadogan, is looking to double its investments outside the M25 to generate enough income to pay the tax liabilities on his investment fund every ten years. Along with e-tailing companies, builders of gigafactories and property developers, it seems to me that there are going to be a lot of buyers in the market!

Then in Klarna CEO says fintech will focus less on growth and more on ‘short-term profitability’ (Financial Times, Richard Milne) we see that Klarna is switching gears from growth to profitabilty as it tries to attract more investment. It seems to me that the company has reached a key stage in its development. It is maturing from a hot (relatively) young thing to a much broader-based maturing business. This is all part of growing up…

Want to engage with myself and the team at Watson’s Daily about these stories? Why not ask us something in the Forum HERE. It’d be great to hear what you think!

5

...AND FINALLY...

…in other news…

Given that the sequel to Top Gun is on general release this week, I thought that this video of Tom Cruise taking James Corden for a bit of a spin in a very small plane might be appropriate! However, if you want a bit of music, here’s a bit of Pomplamoose (yep, you’ve guessed it, I couldn’t find any juicy stories appropriate for this section today 🤣!), but the fact is that every time I hear that song, I think of Stifler’s dance-off. As Finch said, “Mother of God!”. I know I’ve included this dance scene before but it always puts a smile on my face!

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Some of today’s market, commodity & currency moves (as at hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq*DAX *CAC-40 *Nikkei **Shanghai **
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

(markets with an * are at yesterday’s close, ** are at today’s close)